Stablecoins are US$500 billion risk to bank deposits: report

[NEW YORK] As stablecoins gain traction, US banks are at risk of their deposits being syphoned over to the digital asset realm, according to Standard Chartered Bank.

The increased use of cryptocurrencies designed to track a mainstream asset, often the US dollar, threatens to spur the exit of as much as US$500 billion in deposits from lenders in industrialised nations by the end of 2028, an analysis from Geoff Kendrick, global head of digital assets research at Standard Chartered, showed. He views landmark digital-asset legislation as the next likely catalyst for growth in crypto firms such as Coinbase Global, as they square off against financial companies.

US bank deposits will drop by one-third of stablecoin market capitalisation, Standard Chartered estimated. The supply of stablecoins in circulation has already jumped roughly 40 per cent from a year ago to just over US$300 billion today, according to data from DeFi Llama. That pace is expected to accelerate following the passage of the so-called Clarity Act, designed to regulate the digital asset industry, that’s currently making its way through Congress.

“US banks also face a threat as payment networks and other core banking activities shift to stablecoins,” Kendrick wrote in the report.

A key sticking point between banks and crypto exchanges is whether consumers are allowed to earn yield-like rewards in connection with their stablecoin balances. Coinbase currently offers 3.5 per cent rewards on customers’ balances of Circle Internet Group’s USDC coins. Bank lobbying groups fear that if crypto firms are allowed to offer rewards, that poses a material deposit flight risk.

“The bank lobbying groups and bank associations are out there trying to ban their competition,” Brian Armstrong, Coinbase’s chief executive officer, said at the World Economic Forum in Davos last week. “I have zero tolerance for that, I think it’s un-American and it harms consumers.”

Despite the stalemate between the banks and crypto exchanges, Standard Chartered’s Kendrick expects the digital-asset market-structure bill to pass by the end of the first quarter.

Kendrick outlined that net interest margin (NIM) income as a percentage of total bank revenue is the most accurate measure of the deposit flight risk to banks since deposits drive NIM.

“We find that regional US banks are more exposed on this measure than diversified banks and investment banks, which are least exposed,” Kendrick wrote.

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Of the 19 US banks and brokerages he assessed, the top four identified as most at risk were regional banks; Huntington Bancshares, M&T Bank, Truist Financial and Citizens Financial Group.

Compared with the bigger US banks, regional banks are more reliant on lending as a core business, meaning losing deposits would have an outsized impact.

Still, the stablecoin threat is not imminent and the KBW Regional Banking Index has rallied nearly 6 per cent in January, far outpacing the larger cap KBW Bank Index, which is up a little more than 1 per cent.

In the near-term, more gains for lenders could lie ahead as anticipated rate cuts would make deposits cheaper, and the administration’s goal to juice the economy holds the promise of stronger loan growth. But the risks to real-world assets from virtual one is inevitable in Kendrick’s view.

“An individual bank’s actual exposure to a stablecoin-driven reduction in NIM income will depend largely on its own response to the threat,” he said.

He also noted that the two dominant stablecoin issuers, Tether and Circle, hold just 0.02 and 14.5 per cent of the reserves backing their respective tokens in bank deposits, adding that “very little re-depositing is happening”. BLOOMBERG